Appendix — Gould v. Alleco, Inc.

FILED

DEC 7 3583

(0)

8 9 - 9 2 4 Supreme Court, U.S,

No.

Supreme Court Of The ¥eited Shales

OCTOBER TERM, 1989

DAVID P. GOULD, et al.,

Petitioners,

ALLECO, INC., et al.,

Respondents.

ON WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

APPENDIX TO PETITION

FOR WRIT OF CERTIORARI

David Reed Burton

Attorney at Law

306A Hampton Plaza

300 East Joppa Road

Towson, Maryland 21204

(301) 583-9030

Counsel for the

Petitioners

TABLE OF CONTENTS

Appendix

Denial of Petition for Rehearing

by the United States Court of

Appeals for the Fourth Circuit

(September 8, 1989).....eeeeeeeees A-1

Opinion of the United States Court

of Appeals for the Fourth Circuit

{August 16, 1989) eeeeeee eeeeveeeee 7 -B-l

Transcript of Opinion in the

United States District Court for

the District of Maryland

(September 6, 1988).......eeeeeeees C-1

Opinion of the United States

District Court for the

District of Minnesota

(August 16, 1989)... .cccccccccccecs D-1

Petition for Bankruptcy in the

United States Bankruptcy Court

for the District of Maryland

(October 10, 1989)... ceeeeceeees E-1

Statutory Provisions

Maryland Code Annotated,

Corporations, Section 2-301...... .-F-1

Maryland Code Annotated,

Corporations, Section 2-309........G=l

Maryland Code Annotated,

Corporations, Section 2-312 eeeeeee -H-1

Maryland Code Annotated,

Corporations, Section 3-412........ I-1

Federal Rules of Civil Procedure

Rule ON EE a a ok |

Federal Rules of Civil Procedure

Rigle@ 23(@) cccccccscccccccvcccccccecs K-1l

Federal Rules of Civil Procedure

PER SOLE) ccccccvcccscceccccvcccces L-l

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 88-3637

DAVID P. GOULD, et al

Plaintiffs - Appellants

Vv.

ALLECO, INC., et al

Defendants - Appellees

No. 88-3638

In Re: LAWRENCE I. WEISMAN, et al

Appellants

LEONARD ROBINSON, et al

Plaintiffs - Appellees

Vv.

ALLEGHENY BEVERAGE CORP., et al

On Petition for Rehearing with Suggestion

for Rehearing in Banc

The appellant’s petition for

rehearing and suggestion for rehearing in

banc were submitted to this Court. As no

member of this Court or the panel

requested a poll on the suggestion for

rehearing in banc, and

As the panel considered the petition

for rehearing and is of the opinion that

it should be denied,

IT IS ORDERED that the petition for

rehearing and suggestion for rehearing in

banc are denied.

Entered at the direction of Judge

Hall with the concurrence of Judge Ervin

and Judge Wilkinson.

For the Court,

A-2

APPENDIX B

\

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 88-3637

DAVID P. GOULD, et al

Plaintiffs - Appellants

versus

ALLECO, INC., et al

Defendants - Appellees

No. 88-3638

In ré: LAWRENCE I. WEISMAN, et al

Appellants

LEONARD ROBINSON, et al

Plaintiffs - Appellees

versus

ALLEGHENY BEVERAGE CORP., et al

Defendants - Appellees

B-1

Appeal from the United States District

Court for the District of Maryland, at

Baltimore. Frederic N. Smalkin, District

Judge (CA-88-2399) (C/A 86-2309-S)

Argued: Decided:

April 13, 1989 August 16, 1989

Before ERVIN, Chief Judge, and HALL and

WILKINSON, Circuit Judges.

David Reed Burton for Appellant. Bruce

K. Cohen (MEREDITH & COHEN, P.C. on

brief) Stephen Howard Glickman (Leslie A.

Blackmon, ZUCKERMAN, SPAEDER, GOLDSTEIN,

TAYLOR & KOLKER; A. Raymond Randolph,

Daniel I. Prywes, PEPPER, HAMILTON &

SCHEETZ; Steven A. Allen, DAVIS, WEIKEL

& ALLEN on brief) for Appellees.

HALL, Circuit Judge:

Lawrence I. Weisman and two others

appeal from the denial of a motion to

intervene in Robinson v. Allegheny

Beverage Corporation, CA No. S-88-2399

(D. Md.) and from the order approving a

class settlement of the same case.

Weisman also appeals from the district

court’s refusal to address his objections

to the settlement proposal. The district

court determined that the motion to

intervene in the class action was not

timely filed and that the appellants

lacked standing to object to the proposed

Class settlement or to intervene in the

action itself. Finding that the district

court correctly decided each of these

issues, we affirm.

I.

In July, 1986, Allegheny Beverage

Corporation was sued by Robinson and six

other persons who-had purchased Allegheny

stock during a prior thirteen-month

period. The complaint claimed violations

of federal securities laws and state

common law for alleged fraud by the

company’s officers in inflating the

stock’s price. Robinson was consolidated

with two other similar actions, and

almost two years of litigation culminated

in a proposed “Stipulation of Settlement”

which was presented to the district court

on May 17, #1988. This proposal

contemplated payment of $6.95 million to

the plaintiff class. The court

preliminarily approved the settlement,

certified the class for settlement

purposes, scheduled a hearing for

September 6, 1988, to consider the

fairness of the proposal, and set August

1, 1988, as the deadline for the filing

of objections by class members to the

proposal. Notice of the settlement was

mailed to each member of the class and

was published in the Wall Street Journal.

No class members objected to the

settlement but Weisman, an Allegheny

bondholder, filed an "opposition" in

August 1 on behalf of all owners of bonds

issued by the company. The crux of

Weisman’s objection was that bonds, whose

rights to payment he alleged to be

superior to the rights of stockholders,

would be harmed because the Robinson

settlement would dilute the conversion

value of the bonds by depleting the

company’s assets. The company and the

named plaintiffs filed responses to the

objection; Weisman, however, failed to

reply although given the opportunity to

do so.

On August 15, 1988, Weisman and five

others filed a complaint in the district

court against the company and thirty-

three other defendants claiming, among

B-5

other things, $200 million in

compensatory damages and $500 million in

punitive damages for alleged violations

of federal securities law. Gould v.

Alleco, Inc.\1 C/A No. B88-2399 (D. Md.).

On August 24, the district court notified

all parties in both cases that any

requests for injunctive relief in the

Robinson case would be entertained at the

September 6 settlement hearing.

On September 2, the Gould plaintiffs

filed a 155-page amended complaint which

included a request to enjoin the Robinson

settlement. The basis of the request was

the Gould plaintiffs’ contention that

payment of the settlement would impair

the company’s ability to satisfy any

judgment which might be rendered against

\l In the intervening period between

the filing of the Robinson complaint and

the Gould complaint, Allegheny Beverage

Corporation changed its name to Alleco,

Inc.

B-6

it in Gould.

Moments before the commencement of

the September 6 hearing, counsel for the

Robinson parties were served with copies

of the amended Gould complaint and with

a motion by Weisman and two other Gould

plaintiffs to intervene in the Robinson

case and to delay the approval of the

settlement. After extended argument, the

district court denied the motion to

intervene on the grounds that it was

untimely under Fed. R. Civ. P. 24(b) and,

alternatively, that the would-be

intervenors lacked standing. The court

disposed of Weisman’s August 1 objection

to the settlement on the grounds that

Weisman was not a member of the class

and, therefore, had no standing to

object. The court then approved the

settlement and noted that such action

mooted any claims for injunctive relief

against approval sought by the Gould

B-7

plaintiffs.\2

This appeal followed.

II.

On appeal, the appellants contend

that the lower court erred in ignoring

Weisman’s objections to the settlement

proposal and in denying the motion to

intervene on standing and timeliness

grounds. Weisman and the other

intervenor-appellants also address the

merits of the settlement proposal.

\2 Although the notice of appeal in

88-3637 states that the Gould plaintiffs

were appealing from the lower court’s

"September 6, 1988, denial of a

preliminary injunction and other relief

with respect to the proposed settlement, "

the appellants’ brief in this

consolidated appeal does not address the

lower court’s actions regarding Gould.

Thus, the lower court’s denial of the

relief requested in Gould, i.e., to

enjoin the settlement or to appoint a

receiver, is affirmed. We note that the

complaint in Gould was subsequently

dismissed on the ground that it violated

Fed. R. Civ. P. 8(a) (short and plain

statement).

B-8

Because our resolution of the

intervention/objection issues is

completely dispositive, however, we do

not reach the issue of the propriety vel

non of the settlement itself.

The lower court held that Weisman

had no standing to intervene or to

object. Although both the August 1

objection and the intervention motion had

identical purposes, i.e. to delay or halt

the Robinson settlement, resolution of

each requires a slightly different

analysis. We begin with a discussion of

the August 1, 1988, "opposition" or

objection filed by Weisman on behalf of

himself and other bondholders.

A.

Fed. R. Civ. P. 23(e) requires that

notice of any proposed settlement of a

class action be given to "all members of

the class in such manner as the court

directs." No one argues that the manner

B-9

of notice was deficient in any respect;

Weisman, however, contends that his

August 1, 1988, "opposition" to the

settlement should have required the court

to reach the merits of his objection. We

disagree. The plain language of Rule

23(e) clearly contemplates allowing only

class members to object to settlement

proposals. Kusner v. First Penn Corp.,

74 F.R.D. 606, 610 n.3 (E.D. Pa. 1977),

aff'd 577 F.2d 726 (3rd Cir. 1978);

Jenson v. Continental Financial Corp.,

591 F.2d 477, 482 n.7 (8th Cir. 1979).

Beginning from the unassailable premise

that settlements are to be encouraged, it

follows that to routinely allow non-class

members to inject their concerns via

objection at the settlement stage would

tend to frustrate this goal. Were the

rule as Weisman contends, every objection

from a non-class member would trigger an

examination by the court of the effects

B-10

of the proposal on the objector. Kusner,

at 611. We cannot conceive that the

drafters of the Rules intended to permit

such eleventh-hour expansion of class

actions. We hold, therefore, that non-

class members have no standing to object,

pursuant to a Rule 23(e) notice directed

to class members, to a proposed class

settlement. Interjection of the opposing

views of non-class members should proceed

via intervention under Rule 24.\3 We

proceed, then, to a discussion of the

motion by the Weisman intervenors.

B.

Rule 24(a)(2), “Intervention of

Right," requires the court to allow

intervention when, upon timely

\3 Our ruling regarding the lack of

standing of non-class members to object

to proposed settlements should not be

read to restrict the trial court’s

authority to consider or even solicit the

views of non-parties to proposed class

settlements.

B-11

application,

° the applicant claims an

interest relating to the

property or transaction which

is the subject of the action

and the applicant is s0

situated that the disposition

of the action may as 4a

practical matter imkpair or

impede the applicant’s ability

to protect that interest unless

the applicant’s interest is

adequately represented by

existing parties.

Thus, in addition to timeliness,

intervention is dependent on the moving

party’s fulfillment of three

requirements: interest, impairment of

interest and inadequate representation.

3B J. Moore, Moore’s Federal Practice,

24.07(a) (2d ed. 1987); United Guar. Res.

Ins. Co. v. Philadelphia Sav. Pund, 819

F.2d 473, 474 (4th Cir. 1987). The

district court’s denial of the

intervention motion for failure to meet

these requirements will only be disturbed

if an abuse of discretion is found.

Virginia v. Westinghouse Elect. Corp.,

B-12

542 F.2d 214, 216 (4th Cir. 1976);

Aluminum Co. v. Utilities Comm. of State

of N.C., 713 F.2d 1024, 1025, n. 1 (4th

Cir. 1983); Southern Christian Leadership

v. Kelley, 747 F.2d 777, 779 (D.C. Cir.

1984); contra Mothersill D.I.S.C. Corp.

v. Petroleos Mexicanos, S.A., 831 F.2d

59, 61-62 (Sth Cir. 1987) (district

court’s conclusions about Rule 24(a) (2)

requirements other than timeliness are

questions of law and reviewable de novo);

Getty Oil Co. v. Dept. of Energy, 865

F.2d 270 (Em. App. 1988) (adopting a

"sensible blend” of standards of review).

In analyzing whether the Weisman

intervenors meet these requirements, we

will assume that their interests, such as

they are, were not "adequately

represented by existing parties." It is

on the interest requirement of Rule 24(a)

that the Weisman intervenors come up

short. We interpret the district court’s

B-13

use of the term standing to implicate

Rule 24’s interest requirement.

Cases involving non-class members’

attempts to intervene and/or object to

settlements are few, and the courts

usually reject the outsiders’ attempts to

enter the litigation during the

settlement phase. See e.g., Kusner, 74

F.R.D. 606; Jones v. Amalgamated Warbasse

Houses, Inc., 97 F.R.D. 355, 360

(E.D.N.Y. 1982), aff'd 721 F.2d 881 (2nd

Cir. 1983), cert. denied, 466 U.S. 944

(1984); Quad Graphics, Inc. v. Pass, 724

F.2d 1230 (7th Cir. 1983). Weisman

sought to intervene in Robinson under

Rule 24(a)(2), and there is no indication

that this rule is not applicable to class

actions. Therefore, we reject the

blanket proposition advanced by the

appellees that the bondholders, solely by

virtue of their non-inclusion in the

Robinson class, have no standing as a

matter of law to intervene to insure that

their interests are protected. ZG ia,

rather, on the facts of this case upon

which our decision rests. -

The motion to intervene incorporated

by reference the complaint in Gould (the

three would-be intervenors were also

among the six plaintiffs in Gould).

Reduced to its essence, the grounds

asserted in support of the motion are

these: (1) according to the terms of the

debenture instrument, the intervenors, in

their capacity as bondholders, have a

superior interest in Alleco’s assets to

that of the Robinson plaintiffs; and (2)

as Gould plaintiffs, they have potential

judgment claims against Alleco, full

payment of which would be impaired if the

Robinson settlement is permitted to

proceed. Thus, the motion concludes,

"just allocation of the claims against

Alleco, Inc. requires that the

Intervenors be permitted time to

demonstrate to this Court a just and

effective process for handling priority

of claims among those pursuing relief

from Alleco, Inc.”

The bond indenture does limit

Alleco’s right to declare dividends and

to make distributions on capital stock

under certain circumstances. What the

appellants fail to appreciate is that the

Robinson plaintiff class is not composed

of stockholders qua stockholders; rather,

these plaintiffs sued on the basis of

alleged fraud related to their purchase

of stock during a specific period in the

past. The settlement fund represents

damages, not stock distributions. The

fact of prior stock ownership does not

serve to bring the settlement within the

indenture restrictions.

The Gould complaints sought damages

and other relief for federal securities

law violations and various state fraud

violations. The gist of the argument is

that payment of the $6.95 million

settlement would deplete the assets of

Alleco to the prejudice of the Gould

plaintiffs in the event they were

successful in their suit. Merely

claiming a general interest in Alleco’s

assets based on a speculative recovery in

an unrelated civil action does not,

however, satisfy Rule 24’s requirement

that the claim be "relating to the

‘property or transaction which is the

subject of the action." If the

intervenor’s theory is correct, every

proposed settlement would be subject to

derailment as ieee as a potential

judgment creditor decided to intervene.

Kusner, 74 F.R.D. at 611. In a sense,

every company’s stockholders,

bondholders, directors and employees have

a stake in the outcome of any litigation

B-17

involving the company, but this alone is

insufficient to imbue them with the

degree of "interest" required for Rule

24(a) intervention. On the facts

presented by this record, we find that

the lower court did not abuse its

discretion by ruling that the intervenors

had an insufficient interest for Rule

24(a) purposes.

Itt.

The district court also determined

that the intervention motion should be

denied on the grounds that it was not

timely filed. Both intervention of right

and permissive intervention require

“timely application." Fed. R. Civ. P.

24(a), (b). The Supreme Court has held

that this timeliness requirement is

determined by a court in the exercise of

its discretion and that a ruling will not

be disturbed on appeal unless this

discretion is abused. NAACP v. New York,

B-18

413 U.S. 345, 365-66 (1973). This

Circuit has stressed the importance of

timeliness and the wide discretion

afforded the district courts. Brink v.

DaLesio, 667 F.2d 420, 428 (4th Cir.

1981). The Weisman motion is outside

even the most indulgent standard of

timeliness.

The courts are in general agreement

regarding the considerations relevant to

determinations of the timeliness of an

intervention motion. A reviewing court

should look at how far the suit has

progressed, the prejudice which delay

might cause other parties, and the reason

for the tardiness in moving to intervene.

Commonwealth of Pa. v. Rizzo, 530 F.2d

501, 506 (3rd Cir. 1976)(, cert. denied,

Fire Officers Union v. Pennsylvania, 426

U.S. 921 (1976); Vv Vv. , $i1

F.2d 303, 305 (8th Cir. 1975). Each of

these considerations militates against

B-19

the motion. We will discuss each in

turn.

The initial complaint in Robinson

was filed on July 23, 1986, more than two

years prior to the filing of the

intervention motion. Two years of

extensive litigation and settlement

negotiations culminated in the settlement

proposal presented to the court on May

17, 1988. Three and one-half months

later, at the last possible moment, the

intervention motion was filed. The

tardiness of the motion is the strongest

reason supporting its denial.

In United Airlines, Inc. v.

McDonald, 432 U.S. 385 (1977), the

Supreme Court held that a putative class

member 's post-judgment motion to

intervene, for the sole purpose of

appealing the court’s earlier denial of

Class certification, was timely because

it was filed within the time permitted

B-20

for appeal of the judgment. fThe Court

emphasized that intervention prior to the

entry of final judgment would have served

no purposs whatsoever and would have

tended to frustrate Rule 23's goal of

judicial economy. Id. at 394 n.15. The

Court also pointed out that, prior to the

intervention request, the intervenor

reasonably relied on the named class

representatives to protect her interests.

Id. at 394. Similarly, in Fleming v.

Citizens for Albermarle, 577 F.2d 236.

(4th Cir. 1978), cert. denied 439 U.S.

1071 (1979), this Court’s reversal, for

abuse of discretion, of the lower court’s

denial of intervention was based on the

dispatch with which the intervenor-

applicants made their motion relative to

the point at which it became clear that

their interests were not being adequately

represented by the existing defendants.

Here, the intervenors cite United |

B-21

Airlines and Fleming for the proposition

that even post-judgment intervention may

be allowed. However, they do not contend

that intervention at an earlier point

would have served no purpose or that the

tardiness of their motion was a result of

prior reliance on one or more of the

parties in Robinson. While last-second

or even post-judgment intervention may be

proper in some cases, the Weisman

intervenors are unable to demonstrate

that this is such a case.

The second component of the

timeliness analysis, prejudice to the

non-intervening parties, similarly works

against the would-be intervenors. The

intervention motion, if granted, would

likely have required substantial

additional litigation. In addition to

the delay in the disbursal of the

settlement funds which would have ensued

had intervention been permitted, two

B-22

bao thi

provisions in’ the "Stipulation of

Settlement" would have acted to prejudice

the Robinson plaintiff class if the

intervenors had been permitted to

litigate. First, the settlement provided

for the payment of attorneys’ fees from

the $6,950,000 settlement fund itself.

Therefore, additional litigation would

have acted to eat away at the plaintiffs’

share of the fund as their legal fees

rose. Secondly, the stipulation provided

that interest on the fund would only

accrue to the plaintiffs’ benefit after

the court had approved the settlement.

The effect of intervention, then, and the

resulting delay in court approval of the

settlement would have acted to

effectively reduce the value of the fund.

Further delay, then, clearly would have

prejudiced the plaintiff class.

The third consideration guiding the

court’s exercise of discretion is the

B-23

reason for the tardiness of the motion.

Weisman, admittedly the motivating force

behalf all of the various assaults on the

settlement, alleged that his illness was

the reason for the last-second filing.

Weisman’s health problems, however, did

not interfere with his ability to file,

as attorney of record as well as a

plaintiff, the 102-page Gould complaint

(plus 1,835 pages of exhibits) on August

15, 1988, and the 155-page "First

Amended Complaint" on September 2, 1988.

Moreover, the August 1 objection to the

settlement was filed on his behalf by

attorneys from a different law firm than

his co-counsel in Gould. The fact that

he is a lawyer himself, with at least two

law firms retained by him for this and

related litigation, belies his argument

that illness alone should excuse his

last-second filing. Thus, under all the

circumstances of this case, we cannot say

B-24

that the lower court abused its

discretion in denying the motion to

intervene as untimely filed.

For the foregoing reasons, we affirm

the district court’s denial of the motion

to intervene on the alternative grounds

of lack of sufficient interest (standing)

as well as untimeliness. We further

affirm the district court’s ruling that

Weisman lacked standing to object to the

proposed Robinson settlement.

AFFIRMED.

B-25

APPENDIX C

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MARYLAND

LEONARD ROBINSON, et al *

Vv. * Civil Action

ALLEGHENY BEVERAGE * No. S-86-2309

CORP., et al

z*eweekrekx*«#k*keekrek® k

The above-entitled matter came on

for hearing before the Honorable Frederic

Smalkin, commencing at 11:15 a.m. on

September 6th, 1988, at Baltimore,

Maryland.

APPEARANCES

On behalf of the Plaintiffs:

Steven A. Allen, Esquire

Bruce K. Cohen, Esquire

Lawrence Lederman, Esquire

On behalf of the Defendant Lapides and

Alleco, Inc.:

A. Raymond Randolph, Esquire

C-]

On behalf of the Plaintiffs Weisman,

Marks, Inc., and Day:

Paul Sandler, Esquire

David Freishtat, Esquire

Dolph Schmidt, Esquire

On behalf of Defendant Allegheny Beverage

Corporation:

Mark Garfinkle, Esquire

Leslie A. Blackmon, Esquire

Stephen A. Glickman, Esquire

JULIE TRIMMELL BILLUPS, OFFICAL REPORTER

C-2

THE COURT: I don’t think he meant

to bring down Rule 11 on you and I don’t

take his remarks as doing that.

All right. Motion for intervention

and delay of settlement is denied. The

reasons are as follows:

First, I find that Rule 24 does not

give standing to any of the parties that

are seeking to intervene, that is

Weisman, Marks and Day, standing to

intervene as a matter of right. I find

that to say that a shareholder who is not

a member of the class or a general

creditor or trade creditor or a holder of

a debt instrument can intervene with

regard to the fairness hearing portion of

a class action settlement is not an

appropriate construction of Rule 24. I

don’t think it allows any such thing. -

Obviously, anybody who has any

interest at all in the financial health

of the corporation has some kind of

interest in what its bottom line is. It

is going to be affected by any one of a

number of things, including settlements

of litigation, and I think the policy

towards an amicable resolution of

litigation strongly outweighs the right

of somebody to come in and say well, in

the future my stake in the corporation

might be diminished because they might

have less cash than if the conclusion,

which is that if the case went to trial

the corporation might be hit for millions

and millions and hundreds of millions of

dollars in damages and be devastated,

including punitive damages which would

not necessarily be covered by insurance;

so I think that the reed on which

intervention as a matter of right is

sought under Rule 24 is far too thin to

support it under any recognized

interpretation of the rule as I see it.

<r tensa niacin aeacaiilllll

_

Now, going even further, the

intervention has to be timely. I can’t

think of anything that is more untimely

than coming in on the morning of a

hearing that has been set for months and

months, as to which there has been public

notice given by publication and private

notice given otherwise, and coming in on

the morning of that when a vast class of

stockholders is affected and filing a

motion for intervention and for delay of

-@ proceeding that has been set and

advertised for some period of time,

without any strong showing either of

likelihood of any success in bringing

about disapproval of the proposed

settlement or of any recognized harm that

the law will protect being invaded by the

proposed settlement.

This is utterly untimely. Mr.

Weisman has been sick. That is true.

Everybody realizes he’s been sick since

C-5

July sometime. However, these

proceedings have been scheduled for a

long period of time. His local counsel,

Mr. Sandler, certainly has known about

it; but that’s not to say Mr. Weisman

personally knew, but he certainly knew

something was going on.

It is clear to me from reading all

of the motions and papers and letters and

other things that Mr. Weisman has filed

that he is aware and well aware of Mr.

Lapides’ and Alleco’s activities for

months, and that Mr. Weisman has conveyed

not only in the things he has filed with

this Court but in the letters and other

indications that he’s been upset with

what Mr. Lapides and the corporation have

been doing for some period of time.

If you read the material he has

submitted to the Court, there is a lot of

ad hominem excoriation in it, which

indicates to me he has some personal

;

C-6 |

grudge against Lapides and he sees the

corporation as an alter ego of Lapides,

but there is certainly nothing there that

in my judgment is enough to give an

intervention as a matter of right under

the rule, especially with regard to

timeliness. He said he’s been sick but

he found the time to file these numerous

pleadings ana other things at the very

last minute. He had counsel file an

objection, although it was out of time.

It was filed several weeks ago, maybe

even a month ago. I forgot exactly when

the objection came in, and there has been

plenty of time to do things in the

orderly course; therefore, the attempt to

intervene literally at the last minute is

Clearly untimely and will not be

tolerated.

Further, turning to the merits of

the proposed intervention the Court finds

that under settled law, and I must say,

C-7

Mr. Freishtat and Mr. Sandler, you are

recognized aB competent attorneys

certainly by the Courts in this

jurisdiction, including this Court, and

I would put it to you that if there is a

contrary authority to that cited by the

people who oppose intervention, it could

have easily been found through

Shepardizing the one bellwether case or

otherwise in 15 minutes or half an hour

of concentrated legal research.

I think there just is no contrary

authority because it is plain as the nose

on the Sphinx’s face used to be, anyway,

that the class action by shareholders is

susceptible to only one class of

shareholders at a time, and if there is

a class action, and this case has been

certified as a class action, we can’t

have a competing bunch of people who

Claim to be members of the same class

coming in and seeking to represent the

C-8

Class in a position that is antithetical

to that that has been worked out by the

attorneys duly representing the class.

In other words, first in time gets to

represent the class.

Mr. Weisman is coming in at the last

minute. He came in and filed the suit

purporting to represent a class of

stockholders that is already here

represented and litigating, and if you

look at paragraph 23 of the Amended

Complaint you will see that the class

that is purported of shareholders at

least in the Amended Complaint in the

Gould case, and I am talking about S-88-

2399, tracks precisely the class that is

settling in Robinson, and if you were to

just say any attorney who comes in can

represent a4 class that is already

represented by some other attorney, you

put the entire process of class actions,

let alone settlement of class actions,

C-9

into chaos from which it could not be

rescued by any rational process.

Now, turning to Mr. Weisman, who

purports to want to intervene as a

bondholder, he’s not a shareholder, as a

bondholder, I would find that both as to

his objection, which is -- do you have a

docket number of that objection, Ron? It

should be toward the end of the docket.

See if you can pull up the original for

me.

(Pause for document examination. )

THE COURT: It should have been

docketed in 86-2309 towards the very end

of the docket.

Anyway, he clearly in my judgment

has no standing to intervene or to object

to the settlement in his capacity as

debenture holder. The authority is clear

on this. The lead authority that we

could find is Kusner, K-U-S-N-E-R, versus

First Pennsylvania Corp., 74 F.R.D. 606-

C-10

610, Eastern District of Pennsylvania,

1977, affirmed 577 F2d. 726, 3rd Circuit,

1978, in which the Court said, among

other things, that the explicit language

of Rule 23(d)(2) limits intervention to

members of the class. I think that is

pretty clear, and to that extent the

specific rule I should think would govern

over the general rule of Rule 24.

In any event, the Court said that in

Kusner and then said that obviously the

holder of not just debentures but

generically the holder of a instrument of

a different nature or category than that

held by the settlement class simply has

no standing under Rule 23 and if you were

to allow intervention under a different

head, such as Rule 24, it would just

frustrate the purposes of the specific

language of Rule 23(d)(2) and also would

be clearly contrary to common sense and

orderly procedure.

C-11

So what you would basically be doing

is to allow anybody to come in and say I

don’t like this settlement because it

frustrates the ability of the corporation

to pay its other debts, and this is not

the policy that the law should adopt in

this area, in my judgment anyway, and I

will-not tolerate it even if all this had

been timely.

I also note that the objection filed

by Mr. Weisman, although it was more

timely than this, it nevertheless in the

overall scheme of things in my judgment,

still untimely.

As I said, he’s been sick but he has

still been functioning, and he’s been

functional sufficiently to come in with

this last minute flurry of stuff. I see

no reason in law or equity to grant the

motion for intervention or to delay

settlement or to allow him to object to

the proposed settlement. Therefore, I am

C-12

endorsing the motion for intervention

with a marginal order, motion denied for

reasons stated in open court this date.

This is the 6th. Hand me up paper

number 41, Mr. Clerk.

(Discussion held off the record.)

THE COURT: In the meantime, I am

going to endorse a marginal on number 41

also.

There are many other’ reasons

obviously that could be assigned in

support of the Court’s ruling, but I

think I have stated an adequate basis for

it. There are many other cases that

would support it and I don’t think any

useful purpose would be served in going

on at any great length.

C-13

ee

APPENDIX D

UNITED STATES DISTRICT COURT

DISTRICT OF MINNESOTA

ALLECO, INC. : JUDGMENT IN A

CIVIL CASE

Vv.

IBJ SCHRODER BANK & CASE NUMBER:

TRUST COMPANY, Civil 3-87-802

et al

Decision by Court. This action came to

trial or hearing before the Court. The

issues have been tried or heard and a

decision has been rendered.

IT IS ORDERED AND ADJUDGED

1. The motion of Alleco, Inc., LP

Acquisition Corporation, and Lapides

Corporation for summary judgment is

DENIED;

2. The motion of IBJ Schroder Bank

& Trust Company for summary judgment is

GRANTED, as follows:

a. Judgment is entered in favor

of Schroder and against Alleco,

Service America, Lapides and LP,

D-1

dismissing with prejudice the

original Complaint and the First

Amended and Supplemental

Complaint in this matter,

b. Further, judgment is entered

in favor of Schroder on its

First Counterclaim and against

Alleco, Service America, Lapides

and LP, declaring that Alleco is

not released from liability for

the payment of principal and

interest on Alleco’s 9-1/2%

Convertible Senior Subordinated

Debentures Due 2010 in the

principal amount of $105

million, and

c. FPurthe>, judgment is entered

in favor of Schroder on its

Third Counterclaim and against

Alleco, Service America, Lapides

and LP, declaring that LP’s

acquisition on September 14,

1988 of Alleco’s publicly-held

common stock through a tender

offer by LP, the merger of

Alleco with and into LP on

October 18, 1988, and -the

dissolution of the surviving

corporation and the distribution

of its assets to Lapides on

November 8, 1988, constituted a

repudiation of Alleco’s

obligations under the Debentures

and under the Indenture, dated

as of September 1, 1985, between

Alleco and the original trustee,

First Trust Company, Inc., and

a breach of the _ covenants

contained in Section 5.05 of the

Indenture, giving rise to an

Event of Default under the

Indenture and permitting

Schroder properly to give

written notice of default and to

declare the principal of all the

Debentures and the interest

accrued thereon to be

immediately due and payable.

3. The motion of Service America

Corporation for summary judgment is

DENIED with respect to the counterclaims

of IBJ Schroder Bank & Trust Company, and

GRANTED with respect to the counterclaims

of Salomon Brothers, Inc., and Salomon’s

counterclaims are DISMISSED; and

4. The second and fourth

counterclaims of Schroder’s First Amended

and Supplemental Complaint and

Counterclaims are dismissed without

prejudice pursuant to Fed. R. Civ. P.

41(a)(2).

Date: FRANCIS E. DOSAL,

CLERK

Aug. 16, 1989

LS/ Patricia J. Sabin

(by) Patricia J. Sabin,

Deputy Clerk

UNITED STATES DISTRICT COURT

DISTRICT OF MINNESOTA

THIRD DIVISION

Alleco, Inc., Civil File No.

3-87-0802

Plaintiff,

Vv.

IBJ Schroder Bank & Trust Company,

as Successor Trustee,

Defendant,

and

Salomon Brothers, Inc.,

Intervenor.

wee nn ee MEMORANDUM

ORDER

Salomon Brothers, Inc.,

Intervenor/

Counterclaim

Plaintiff,

Vv.

Alleco, Inc. and Service

America Corporation,

Counterclaim

Defendants.

IBJ Schroder Bank & Trust Company,

Defendant/

Counterclaim

Plaintiff,

Vv.

Alleco, Inc., et al

Counterclaim

Defendants.

George M. von Mehren, Esq., Squire,

Sanders & Dempsey, 1800 Huntington

Building, Cleveland, OH 44115; E.

Timothy McAuliffe, Esq., Coudert

Brothers, 1627 I Street NW, Washington,

DC 20006; R. Walter Bachman, Esq.,

Lindquist & Vennum, 4200 IDS Center, 80

South Eighth Street, Minneapolis, MN

55402; and Richard A. Kaplan, Esq.,

Popham, Haik, Schnobrich & Kaufman, Ltd.,

3300 Piper Jaffray Tower, 222 South Ninth

Street, Minneapolis, MN 55402, on behalf

of Alleco, Inc., Lapides Corporation, and

LP Acquisition Corp.

James B. Loken, Esq., Faegre & Benson,

2200 Norwest Center, 90 South Seventh

St., Minneapolis, MN 55402; and Arthur

S. Linker, Esq., Roseman & Colin, 575

Madison Ave., New York, NY 10022, on

behalf of IBJ Schroder Bank & Trust

Company.

Christine B. Pendry, Esq., Davis, Polk &

Wardwell, One Chase Manhattan Plaza, New

York, NY 10005; and Charles Quaintance,

Jr., Esq., Maslon, Edelman, Borman &

Brand, 1800 Midwest Plaza, Minneapolis,

MN 55402, on behalf of Service America

Corporation.

Timothy D. Kelly, Esq., Kelly & Berens,

P.A., 3720 IDS Center, 80 South Eighth

St., Minneapolis, MN 55402, on behal®£ of

Fidelity Management and Resource Company,

amicus curiae.

In September 1985, Allegheny

Beverage Corporation issued $105 million

in 9-1/2% Convertible Senior Subordinated

Debentures Due 2010. This dispute

focuses on the interpretation of the

Debenture Certificates and the

accompanying Indenture. Within three

years after these Debentures\1l were

issued, the company changed its name to

Alleco, Inc., sold off its operating

subsidiaries, and dissolved.

Alleco sold its final subsidiary,

\l Alleco las issued other

debentures which are not relevant to this

proceeding. Hereinefter, any reference

to the term Debenturs with an upper case

"D" refers to Alleco’s 9-1/2% convertible

debentures due 2010.

Service America Corporation, via a

leveraged buy-out in December 1987.

Service America, now a wholly-owned

subsidiary of Servam Corporation, assumed

the payment obligations on the

Debentures. One of the issues before

this court is whether Alleco has been

released from its payment obligation by

Service America’s assumption and

subsequent events.

Service America did not assume the

Debentures’ conversion obligation. This

remained with Alleco. Alleco’s

controlling shareholder, Martin Lapides,

commenced a tender offer for Alleco

common stock in July 1988. This tender

offer, accomplished through LP

Acquisition Corporation, resulted in the

merger of Alleco and LP Acquisition on

October 18, 1988. A supplemental

indenture provided, pursuant to section

15.06 of the original Indenture, that all

Debenture holders retained the right to

receive $465 for each $1,000 in Debenture

principal in lieu of the right to convert

to the now extinct Alleco common stock.

Lapides dissolved Alleco on November

8, 1988. He assumed Alleco’s assets and

liabilities. However, he did not assume

any obligations under the Debentures and

Indenture. The other two issues before

the court are whether the tender offer,

merger and dissolution violated the

antidilution provisions of the Indenture,

and whether the dissolution released

Alleco from the conversion obligation.

The court finds, for the reasons

stated below, that Alleco remains liable

for the payment and conversion

obligations of the Debentures, and that

the LP tender offer violated an explicit

covenant of the Indenture. Therefore,

Alleco’s motion for summary judgment is

denied, the motion of IBJ Schroder Bank

D-9

v

& Trust Company for summary judgment is

granted, and Service America’s motion for

summary judgment is denied as to

Schroder’s counterclaims, and granted as

to the counterclaims of Salomon Brothers,

Inc.

Procedural background

Alleco commenced this action on

November 30, 1987 against the original

trustee, First Trust Company. Alleco

seeks a declaration that it was released

from the payment obligation when Service

America assumed that obligation.

Salomon Brothers, Inc., which owns

$18,575,000 principal amount of the

Debentures, obtained permission to

intervene, and filed a counterclaim

seeking, inter alia, a declaration that

Alleco remains liable for the payment

obligation, and that Alleco is in default

by the terms of the Indenture.

In May 1988, IBJ Schroder Bank &

D-10

Trust Company succeeded First Trust as

trustee, and was also substituted as the

defendant in this action. Schroder filed

a counterclaim seeking a declaration that

Alleco has not been released from its

payment obligation.

The Lapides-sponsored tender offer

for Alleco stock was announced on July

13, 1988. Shortly thereafter, Schroder

notified Alleco that it believed that the

proposed tender offer, merger, and

dissolution would constitute a —-" of

Alleco’s obligations under the Indenture.

In response, Alleco filed an amended and

supplemental complaint seeking, inter

alia, a declaration that the proposed

transactions would not violate the

Indenture, and that the surviving

corporation would be released from all

obligations under the Debentures and

Indenture.

Following this court’s denial of

D-11

Schroder’s motion to preliminarily enjoin

the Alleco tender offer, Schroder filed

an amended answer and counterclaim which

essentially mirrors the additional

declaratory relief sought by Alleco in

its supplemental complaint.

Now before the court are cross-

motions for summary judgment. Alleco,

with its affiliated companies, LP

Acquisition Corporation and Lapides

Corporation [hereinafter collectively

referred to as Alleco] seek a declaration

from this court that the various

transactions noted above conformed with

the terms of the Debentures and

Indenture, as supplemented.

Schroder seeks summary judgment on

its claims that Alleco remains obligated

to honor both the payment and conversion

obligations of the Debentures, and that

the merger and dissolution constitute

events of default as that term is defined

Oe

by the Indenture, as supplemented.

Schroder seeks summary judgment on

its claims that Alleco remains obligated

to honor both the payment and conversion

obligations of the Debentures, and that

the merger and dissolution constitute

events of default as that term is defined

by the Indenture. Salomon joins in this

motion.

Service America, a counterclaim

defendant, seeks summary judgment against

the claims of Schroder and Salomon.

PACTS

Prior to 1981, Alleco was solely a

beverage company. Between 1981 and 1985,

the company acquired businesses in food

service, laundry service, building

maintenance, and retail office furniture.

In May 1985 it sold its beverage

operations and acquired Servomation

Corporation. Alleco’s smaller food

service operations were consolidated with

Dai

Servomation to form Service America.

The Debentures were issued in

September 1985. Between December 1986

and July 1987, Alleco sold its building

maintenance, laundry service, and retail

office furniture subsidiaries for $86.5

million. The proceeds were used

principally to pay down bank debt.

Alleco paid no dividend and made no

distributions to shareholders following

these sales.

In May 1987, Alleco entered into a

stock purchase agreement for the sale of

its Service America subsidiary. The

purchasing entity, SAC Acquiring

Corporation, was a wholly-owned

subsidiary of Servam Corporation, which

was owned by certain senior management of

Service America and other investors.

In order to facilitate this sale,

Alleco commenced a tender offer for the

redemption of the Debentures, including

D-14

a five percent premium. This offer fell

apart following the October 1987 stock

market crash. Alleco and Servam then

arranged for Service America to assume

the Debentures.

The sale of Service America took

place on December 2, 1987. By means of

a lovenseudl buyout, SAC paid $345 million

in cash, and took over payments on the

$105 million in Debentures. Along with

that sale, Alleco, SAC, and First Trust

executed a First Supplemental Indenture

which provided that SAC would assume the

payment obligation. By terms of the

Second Supplemental Indenture, executed

the same day, this duty was assumed by

Service America. Responsibility for the

Debenture’s convertibility remained with

Alleco.

Alleco believed that the terms of

the original Indenture entitled Alleco to

@a release from any payment obligation

D-15

once Service America assumed that duty.

Accordingly, Alleco wanted the First

Supplemental Indenture to provide for

that release. First Trust did not agree

with Alleco’s interpretation of the

Indenture, and refused to execute a

supplemental indenture which explicitly

released Alleco.

The First Supplemental Indenture

left unresolved the issue of Alleco’s

release. Alleco filed this action in

order to obtain a declaration that it had

bene released.

Following the Service America sale,

Alleco had approximately $130 million in

cash which it intended to commit to other

lines of business. Morton Lapides,

Alleco’s chairman of the board and chief

executive officer held 21.6% of Alleco’s

equity through a family holding company,

Lapides Corporation. Lapides also

controlled a special class of stock which

D-16

allowed him to elect a majority of

Alleco’s board. In May 1988, Lapides

began to pursue a plan for the purchase

of the Alleco common stock not held by

Lapides. This resulted in the July 1988

tender offer by LP Acquisition

Corporation, a Lapides subsidiary, for

Alleco common stock at $10 per share.

The offering document for the tender

outlined the planned merger of Alleco and

LP, and the eventual dissolution of

Alleco and distribution of its assets to

Lapides. This "Offer to Purchase

states:

In connection with such

dissolution, the assets and

liabilities of [Alleco] would

be assumed by Lapides, and

Lapides would continue’ to

operate the business of

[Alleco]. Lapides also intends

to assume all of the Company’s

obligations under the

indentures covering its”

outstanding subordinated

indebtedness (other than the

Convertible Debentures) and to

pay such indebtedness...in

accordance with the terms of

the indentures.

Linker aff., Ex. R at 14.

LP purchased the outstanding Alleco

common stock for $67.5 million. Lapides

contributed $2.5 million, and LP obtained

a $65 million bridge loan from two banks.

On October 18, 1988, LP and Alleco merged

via a statutory short form merger. The

bridge loan was then repaid using

Alleco’s own funds.

That same day, Alleco, Service

America and Schroder, as successor

trustee, executed a Third Supplemental

Indenture. This supplement provided that

the Debentures would be convertible into

cash pursuant to the formula established

in Article Fifteen cf the original

Indenture. In other words, the right to

convert to Alleco stock became the right

to exchange each $1,000 in Debenture

principal for $465 in cash. The Third

Supplemental Indenture also reiterated

that “the holder of any Debenture shall

have the right, at his option, at any

time prior to the close of business on

September 1, 2010..." to make the

conversion to cash, subject only to the

Company’s right to redeem the Debentures.

Lapides aff., Ex., 18 at 7-8. The

surviving corporation, which changed its

name to Alleco, Inc. retained the

responsibility to honor the conversion

rights.

On October 21, Lapides notified all

Debenture holders that Alleco would be

voluntarily dissolved. Following

dissolution, Lapides disclaimed any

responsibility for the Debentures. All

interest installments have been paid when

due by Service America. Lapides takes

the position that the conversion right

expired shortly after Alleco dissolved.

ANALYSIS

The court’s jurisdiction over this

D-19

matter is based on 28 U.S.C. Section

1332, and venue is proper in this

district.

As is often the case in a

declaratory judgment action, the facts

giving rise to this cause of action are

not in dispute. The dispute concerns the

application of the parties’ contract--the

Debentures and the Indenture--to the

transactions described above.

The Eighth Circuit observed in Trnka

v. Elance Products Co., 709 F.2d 1223,

1227 (8th Cir. 1983), that “disputes

involving the interpretation of

unambiguous contracts are appropriate

cases for the entry of summary judgment."

This is particularly true when the

interpretation of a standardized document

like an indenture is involved. Sharon

Stee] Corp. v. Chase Manhattan Bank,

N.A., 691 £.2D 1039, 1048 (2D cIR. 1982),

CERT. DENIED, 460 u.s. 1012 (1983). The

D-20

BO AEE (BG) BE eee

parties do not contend, and the court

does not find, that the contract is

ambiguous. Its interpretation is quite

properly a matter of law. Id.

The term “debenture” refers to a

long-term unsecured debt security, issued

pursuant to an indenture, and with an

indenture trustee. The relationship

between the issuer (debtor) and the

debenture holders (lenders) is a matter

of contract. The obligation to repay the

debt runs directly from the issuer to the

holders, and the other rights conferred

by the indenture run from the issuer to

the trustee for the benefit of the

holders. v. Roc Int’l -

642 F.2d 929, 941-42 (5th Cir. April

1981), cert. denied, 454 U.S. 965 (1981).

Convertible debentures, while

primarily debt securities, contain an

equity option. The conversion right is

separate and distinct from the debt, and

D-21

aa

has its own ascertainable value. [Id. at

942 (quoting American Bar Found.,

Commentaries on Indentures 522-23).

Before the court are three issues

concerning Alleco’s relationship with its

Indenture Trustee and with its Debenture

holders: first, whether Alleco has been

released from its obligation to make

payments on the Debentures; second,

whether the LP tender offer and

subsequent dissolution breached the terms

of the Indenture; and third, whether the

conversion feature of the Debentures has

been extinguished.

I. Payment obligation

Alleco contends that it was

discharged from its payment obligation

when Service America became the successor

obligor under the First and Second

Supplemental Indentures. Alternatively,

Alleco argues that it was released upon

its dissolution pursuant to section 12.02

D-22

of the Indenture.

Schroder responds that the original

trustee, First Trust, never agreed to a

novation, and therefore Alleco was not

released from its payment obligation.

Further Schroder contends that Alleco has

not been released from this obligation

because the Debenture certificates make

no provision for Alleco’s substitution or

release.

It is elementary contract law that

substitution and release are separate

events. Substitution does not discharge

the obligor. Without a novation the

obligee retains all rights against the

obligor.

[O}ne who is bound to any

performance whatever...cannot

by any act of his own, or by

any act in agreement with any

other person than...the one to

whom his performance is due,

cast off his own liability and

substitute another’s liability.

If this were not true, obligors

could free themselves of their

obligations by the’ simple

D-23

expedient of assigning them....

(Tjhe performance of the third

party is the act of the

promisor, who remains liable

under the contract and

answerable in damages if the

performance be not in strict

fulfillment of the contract.

Crane Ice Cream Co. v. Terminal Freezing

& Heating Co., 147 Md. 588, 128 A. 280,

283 (1925).

The Debenture holders and_ the

Trustee entered into this contract in

reliance on Alleco’s promise to perform

its obligations. Because there is no

authority in the law of contract for

Alleco’s unilateral release from these

obligations, Alleco’s only grounds for

release is the terms of the contract.

Article Twelve of the Indenture

provides for the sale or merger of

Alleco. Specifically, section 12.01

states that "nothing contained in this

Indenture or in any of the

Debentures...shall prevent any sale,

D-24

conveyance or lease...of all or

substantially all of the property\2 of

the Company, to any other

corporation...." This allowance for

corporate flexibility, however, is

conditioned on the proviso that:

The Company hereby covenants

and agrees, that upon any such

consolidation, sale, merger,

conveyance or lease, the due

and punctual payment of the

principal of and premium, if

any, and interest on all of the

Debentures, according to their

tenor and the due and punctual

performance and observance of

all of the Covenants and

Conditions of this Indenture to

be performed by the Company,

\2 Whether the sale of Service

America represented “substantially all"

of Alleco’s property is a matter

vigorously disputed by the parties.

However, this issue does not create a

material factual dispute because its

resolution is irrelevant to the outcome

of the case. For purposes of this

motion, the court accepts Alleco’s

contention that the sale of Service

America constituted the sale of

substantially all of Alleco’s assets.

Indenture (Lapides aff. Ex. 1), Section

12.01 at 83.

D-25

shall be elxpressly assumed, by

supplemental indenture

satisfactory in form to the

Trustee...by the corporation

which shall have acquired or

leased such property.

In other words, Alleco agreed that

any successor corporation would assume

all covenants and conditions of the

Indenture, and that the form of the

assumption must be acceptable to the

Trustee. Section 12.01 does nct mention

release. Indeed, there is nothing in the

Indenture which would require the Trustee

to release Alleco following that sale.

Alleco could not negotiate a release from

First Trust, and since First Trust’s

refusal is not inconsistent with the

terms of the Indenture, this court has

absolutely no grounds for imposing a

novation.

Alleco argues, alternatively, that

it was released from the payment

obligation upon its dissolution, as

D-26

allowed under section 12.02 of the

Indenture.\3 This section requires the

successor to assume all of Alleco’s

\3 Section 12.02 of the Indenture

provides in relevant part: Successor

- In case

of any such consolidation, merger, sale,

conveyance or lease and upon the

assumption by the successor corporation,

by supplemental indenture, executed and

delivered to the Trustee and satisfactory

in form to the Trustee, of the due and

punctual payment of the principal of a

premium, if any, and interest on all of

the Debentures and the due and punctual

performance of all of the covenants and

conditions of this Indenture to be

performed by the Company, such successor

corporation shall succeed to and be

substituted for the Company, with the

same effect as if it had been named

herein as the party of the first part...

In the event of any such

consolidation, merger, sale, conveyance

or lease, the person named as_ the

"Company" in the first paragraph of this

Indenture or any successor which shall

thereafter have become such in the manner

prescribed in this Article Twelve may be

dissolved, wound up and liquidated at any

time thereafter and such person shall be

released from its liabilities as obligor

and maker of the Debentures and from its

obligations under this Indenture.

Lapides aff. Ex. 1 at 84.

D-27

obligations for these Debentures, and

then allows Alleco to be released from

these obligations upon its dissolution.

The only provision for the release of

Alleco from its obligations for these

Debentures is found in this section.

Following the sale of Service

America, Alleco remained liable to the

Debenture holders for any failure of

Service America to make payments.

Further, Alleco explicitly covenanted in

the First Supplemental Indenture to honor

the conversion cbligation of the

Debentures. Lapides aff., Ex. 6, Section

3 a 6. That is, the Debentures

continued to be convertible to Alleco

common stock per the agreed formula.

Alleco also explicitly covenanted in the

First Supplemental Indenture to continue

to be bound by Section 5.05 of the

Indenture. Id. Section 4(d) at 12.

Section 5.05 prohibits Alleco from, inter

D-28

eee ah ee oe en eS ee eee eee

ok tpcitiy“s Wnt a

alia, redeeming any shares of its capital

stock unless certain financial criteria

were first satisfied.

The court finds, based on the

language of section 12.02 that a

condition precedent to Alleco’s release

was the assumption by Service America of

all covenants and conditions of the

Indenture. The section requires the

execution of a supplemental indenture by

which a successor corporation assumes the

due and punctual payment of principal,

premium, if any, and interest, "and the

due and punctual performance of all the

covenants and conditions of this

Indenture to be performed by the

Company...." The section then allows for

a release upon dissolution. There is no

provision for a partial release.

As noted above, Service America did

not assume certain major obligations.

Not having met thé requirement that the

D-29

:

successor assume all obligations, there

is no reason to consider what follows --

release. This section, and sections like

it, provide issuers with flexibility. In

return, such sections assure the holders

that the issuer will provide for its

covenants. This dispute is a case in

point. Alleco arranged for Service

America to make payments, but made no

provision for its conversion obligation.

In fact, Alleco repudiated that

obligation. This is precisely the type

of misconduct against which section 12.02

was intended to protect.

In conclusion, because Alleco failed

to provide a successor to assume all of

its obligations, it is not entitled to a

release of any of its obligations.

Alleco remains accountable for the due

and punctual payment of the principal,

premium, if any, and interest on the

Debentures.

D-30

Schroder contends that Alleco cannot

be released from the payment obligation

because the Debenture certificates make

no provision for Alleco’s release.

Alleco responds that the Debentures

require "the Company” to make payments,

and that Article Twelve of the Indenture

defines the conditions under which a

successor may become “the Company."

Alleco does not dispute that the

Debentures fail to provide the holders

with any notice of Alleco’s potential

release or the circumstances under which

such release may be obtained. In fact,

each Debenture states:

No reference herein to the

Indenture and no provision of

this Debenture or of the

Indenture shall alter or impair

the obligation of the Company,

which is absolute and

unconditional, to pay the

principal of any premium and

interest on this Debenture at

the place, at the respective

times, at the rate and in the

coin or currency herein

prescribed.

D-31

Lapides aff. Ex. 1 at 5.

Further, the Debentures provide only

one definition of “Company”:

ALLEGHENY BEVERAGE CORPORATION,

a corporation duly organized

and existing under the laws of

the State of Maryland (herein

called the “Company")....

Id. at 1. The document gives no notice

that a party other than Alleco may take

over the duties of the obligor.

These Debentures are a “certificated

security” under section 8-102(1)(a) of

the Maryland Commercial Code. Section 8-

202(1)(c) allows such a security to

incorporate the terms of an indenture by

reference, but only “to the extent that

the terms referred to do not conflict

with the terms stated on the certificated

security...." Here, the Indenture’s

provisions for substitution and release

are, by omission, inconsistent with the

D-32

terms of the Debenture.\4 In sum,

regardless of the above interpretation of

Article Twelve of the Indenture, any

Claim of release is ineffective because

of Alleco’s failure to disclose this

possibility on the face of the

Debentures.

II. Tender Offer and Merger

Pursuant to a successful tender

\4 The comments accompanying the

American Bar Association’s

Simplified Indenture are consistent with

the commercial code. The model

indenture’s section on mergers,

consolidations or sales does not provide

for the release of the original issuer.

According to the comments:

Issuers objecting to such

continuing liability, or

concerned that such liability

may make it difficult to

liquidate (or to proceed as an

investment company) following

a sale of assets, should change

the last paragraph of this

Section and eonsider

appropriate summary disclosure

in the form of Security.

, Section 5.01

Model Simplified Indenture

comment 6, 38 Bus. Law. 741, 791 (1982)

(emphasis added).

D-33

offer, LP Acquisition Corporation

purchased the outstanding shares of

Alleco common stock for $67.5 million.

The two companies merged, and the new

company was named Alleco, inc. The

following day, Alleco repaid a bridge

loan of $65 million taken out by LP to

finance the purchase of Alleco common

stock. There is no dispute that the

funds used to repay this loan were assets

of the former Alleco, Inc. prior to the

merger.

Schroder contends that this series

of transactions violated section 5.05(a)

of the Indenture\5. This section allows

\5 Section 5.05(a) provides:

Restrictions on Dividends and

Redemption of Capital Stock.

No dividend whatever shall be

declared or paid not shall any

distribution be made on any

capital stock of the Company

(except in shares of capital

stock of the Company), nor

shall any shares of capital

D-34

Alleco to pay dividends or, make

distributions to shareholders, or to

redeem its capital stock only if the

companay can first satisfy cértain

financial requirements.

Alleco does not contend that it

satissfied the requirements of section

5.05 at the time of the tender offer. It

contends that the section does not apply

stock of the Company. be

acquired or redeemed by the

Company or any Subsidiary,

unless after giving effect to

such dividend, distribution,

acquisition or redemption, the -

aggregate payments for all such

purposes subsequent to June 30,

1985 would not exceed the sum

of (A) 50% of the Net Income of

the Company (determined on a

cumulative basis) for’ the

period commencing July 1, 1985

and ending or the last day of

the immediately preceding

calendar month (or in the event

that such Net Income

(detscmined on a cumulative

basis) is a negative amount,

100% of such Net Income); (B)

the aggregate of the net

proceed received by the Company

from the sale for cash or other

D-35

because LP, not Alleco, purchased

Alleco’s common. stock. In essence,

Alleco asks the court to ignore the

substance of these transactions, and look

only at their form.

Such sections are common. They

protect debenture holders from the

dissipation of corporate assets to

shareholders, thus maintaining the

property (including issuance in

any merger, consolidation or

similar transaction) or shares

of its capital stock subsequent

to September 1, 1985; (C) the

aggregate of the net proceeds

received by the Company from

the issuance of the Debentures

or the issuance of sale of any

other debt obligation of the

Company, which Debentures or

debt obligation shall have been

converted into shares of Common

Stock of the Company after

September 1, 1985; and (D)

$12,000,000.00

Lapides aff. Ex. 1 at 40. As noted

previously, Alleco reaffirmed its

obligations under this section in the

First Supplemental Indenture, Section

4(d).

D-36

capacity of the issuer to make payments

and preventing the issuer from diluting

the value of a conversion feature. If

the court were to accept Alleco’s

argument, then sections like 5.05 would

provide little or no protection for

debenture holders. According to Alleco,

establishing a shell corporation is all

that is necessary to sidestep an

obligor’s promise to maintain its assets.

LP’s tender was in effect a self-

tender. Alleco cash was used to purchase

Alleco shares. As a result of these

transactions, Alleco’s primary

shareholder received a huge distribution

of Alleco assets. This is precisely the

result intended by lLapides when he

initiated the tender offer, and this is

precisely the conduct which section 5.05

prohibits.

If sections like 5.05 are to have

any meaning, courts must consider the

D-37

substance of the disputed transaction.

"(W)hat cannot be legally done in one act

does not necessarily become legal when

the act is split up into various steps,

all seeking and attempting to do in final

result, what the one act might have

accomplished." In re Associated Gas &

Elec. Co., 61 F. Supp. 11, 28 (S.D. N.Y.

1944) (issuer violated indenture by

executing many partial sales of assets in

derogation of covenant to not sell

substantially all of its assets), aff'd,

149 F.2d 996 (2d. Cir.), cert. denied sub

nom., 326 U.S. 736 (1945). See also

Mayor of Baltimore v. Bio Gro Systems,

Inc., 300 Md. 248, 477 A.2d 783, 787

(1984) (city cannot do indirectly what it

is prohibited from doing directly).

In sum, the tender offer and merger

violated the terms of section 5.05.

D-38

‘ |

Under section 7.01(d)\6 of the Indenture,

\6 Section 7.01 of the Indenture

provides in relevant part:

° In case one or

more of the following Events of

Default...shall have occurred and be

continuing: |

(d) failure on the part o: the

Company duly to observe or

perform any other of _ the

covenants or agreements on the

part of the Company in the

Debentures or in this Indenture

continued fora period of sixty

days after the date on which

written notice of such failure,

requiring the Company to remedy

the same, shall have been given

to the Company by the Trustee,

or to the Company and the

Trustee by the holders of at

least twenty-five percent in

aggregate principal amount of

the Debentures at the time

outstanding;

then and in each and every such case,

unless the principal of all of the

Debentures shall have already become due

and payable, either the Trustee or the

holders of not less than twenty-five

percent in aggregate principal amount of

the Debentures then outstanding

hereunder, by notice in writing to the

company (and to the Trustee if given by

D-39

Alleco’s failure to honor section 5.05

constitutes an event of default.

III. Conversion Obligation

The Third Supplemental Indenture,

executed on October 18, 1988 following

the merger of LP and Alleco, provides

that “each Debenture shall be convertible

into, and only into, cash in the manner

provided in Article Fifteen of the

Amended Original Indenture, as amended

and supplemented by this Third

Supplemental Indenture.” lLapides aff.,

Ex. 18 at 7. Section 15.06 of the

original Indenture provides for the

Debentureholders), may declare

the principal of all the

Debentures and t he interest

accrued thereon to be due and

payable immediately, and upon

any such declaration the same

shall become and shall be

immediately due and payable,

anything in this Indenture or

in the Debentures contained to

t he se ee oe ee er Oe ee

notwithstanding....

Lapides aff., Ex. 1 at 46-47.

D-40

da a Da a)

convertibility of the Debentures in the

event of a merger or similar transaction.

It requires the successor coporation to

execute a supplemental indenture

"providing that each Debenture shall be

convertible into the kind and amount of

shares of stock and other securities or

property or assets (including cash)..."

which the holder would have received had

he converted such Debentures immediately

prior to the merger. Lapides aff., Ex.

1 at 93-94. |

LP offered $10 cash for each share

cf Alleco common stock, and the

Debentures are convertible to 46.5 shares

of Alleco common stock. Therefore, the

Third Supplemental Indenture transformed

the conversion feature into the right to

receive $465 cash for each $1,000 in

Debenture principal. This supplement

also reaffirmed section 15.01 of the

Indenture concerning each Debenture

D-41

holder’s right to convert at any time

prior to the close of business on

September 1, 2010, subject only to the

company’s right to redeem the Debentures

prior to that date. Lapides aff., Ex. 18

at 7-8.

Alleco contends that the conversion

feature was extinguished upon Alleco’s

dissolution. However, there is

absolutely nothing in the original

Indenture or the supplements which allows

the company or a successor to repudiate

its conversion obligation. Section 12.02

of the Indenture provides for a release

upon dissolution if a successor has

assumed all obligations and covenants

under the Indenture. No successor

assumed the conversion obligation.

Alleco argues that section 15.10 of

the Indenture provides grounds for the

extinguishing of its conversion

obligation. However, this section is

D-42

nothing more than a notice provision. It

simply allows holders to exercise their

conversion rights prior to certain

events, including a dissolution. It does

not provide any warning to holders of the

possible loss of their conversion rights

upon dissolution. Lapides aff. Ex. 1 at

95-96.

A corporation cannot obtain a

release from its obligations by means of

a voluntary dissolution, especially when

& purpose of the dissolution is the

avoidance of an undesirable contract.

16A Fletcher’s Cyclopedia of

Corporations, Section 8120 at 375-76

(1988 rev. ed.). Such is the case here.

The offering document for the LP tender

revealed Lapides’ intent to repudiate all

obligations to these Debenture holders

following Alleco’s dissolution.

The Indenture explicitly provides

that the right to convert is exercisable

D-43

until the year 2010. The repudiation of

this right is without foundation in the

parties’ contract. In sum, Alleco

remains liable for the convertibility of

these Debentures, per its undertaking in

Article Fifteen of the Indenture, as

supplemented by the Third Supplemental

Indenture.

Iv. Other Matters

Schroder asks the court to dismiss

without prejudice its second and fourth

counterclaims. Its second counterclaim,

seeking to enjoin the LP tender offer,

merger, and dissolution, is now moot.

The fourth counterclaim alleges

violations of the Maryland Uniform

Fraudulent Conveyances Act. Md. Com.

Code Ann., Subsection 15-201 et seg.

Alleco objects, arguing that instead

of dismissal the court should grant

Alleco summary judgment against these

counts. Alleco’s argument is that since

D-44

Alleco has been released form its

obligations on these Debentures, the

holders are no longer creditors of

Alleco. If not creditors, therefore,

they can have no claim under the Act.

However, since Alleco has not been

released, the holders remain creditors of

Alleco. Summary judgment, therefore, is

not warranted.

The decision to grant a voluntary

dismissal, pursuant to Fed. R. Civ. P.

41(a)(2), is a matter committed to the

sound discretion of the trial court.

Holmgren _v. Massey-Ferguson, Inc., 516

F.2d 856, 8567 n.1 (8th Cir. 1972).

Given the developments since Schroder

filed its counterclaim, these two counts

now encompass issues and parties beyond

this litigation. The court, therefore,

will grant Schroder’s motion to dismiss

these counts without prejudice.

Based on the stipulation of the

D-45

parties, and pursuant to Fed. R. Civ. P.

24, Salomon Brothers, Inc. was permitted

to intervene as a party defendant in

January 1988. Salomon filed

counterclaims seeking declaratory relief

similar to that sought by Schroder,

seeking certification of a class, and

seeking imposition of a constructive

trust on Service America’s assets.

Salomon filed its counterclaims

prior to Schroder’s appointment as

successor trustee. Salomon has since

indicated its satisfaction with

Schroder’s protection of the Debenture

holder’s interests. Correspondingly,

Salomon has been less vigorous in its

pursuit of its counterclaims.

The "no action" clause of the

Indenture, section 7.04\7 restricts the

rights of holders of less than twenty-

\7 Lapides aff., Ex. 1 at 51-52.

D-46

parties, and pursuant to Fed. R. Civ. P.

24, Salomon Brothers, Inc. was permitted

to intervene as a party defendant in

January 1988. Salomon filed

counterclaims seeking declaratory relief

similar to that sought by Schroder,

seeking certification of a class, and

seeking imposition of a constructive

trust on Service America’s assets.

Salomon filed its counterclaims

prior to Schroder’s appointment as

successor trustee. Salomon has since

indicated its satisfaction with

Schroder’s protection of the Debenture

holder’s interests. Correspondingly,

Salomon has been less vigorous in its

pursuit of its counterclaims.

The "no action" clause of the

Indenture, section 7.04\7 restricts the

rights of holders of less than twenty-

five percent of the aggregate principal

amount of the Debentures to bring suit on

D-47

five percent of the aggregate principal

amount of the Debentures to bring suit on

theiir own. Salomon holds approximately

19% of the Debentures principal. Under

this section, therefore, Salomon may

bring suit only to enforce its right to

payment or its conversion right.

Accordingly, Salomon’s counterclaim for

class certification and constructive

trust are dismissed for failure to comply

with the terms of section 7.04.

Service America has made all

payments when due. Salomon counts

related to payment, therefore, fail to

state a claim. In any event, these

Claims have been fully presented by

Schroder as trustee. Salomon has pled no

count related to the conversion right.

In sum, two of Salomon’s counterclaims

are barred by the terms of the Indenture,

and the counts on which direct action is

permitted fail to state a clain.

D-48

CONCLUSION

Though complicated by the amount in

controversy, this is a relatively simple

case. Alleco and its controlling

shareholder have flaunted the Indenture,

and have pursued these schemes with utter

disregard for the rights of the Debenture

holders. This conduct violated numerous

terms of the Indenture. Consistent with

Article Seven of the Indenture, Alleco

has defaulted on its obligations to its

Debenture holders.

Accordingly, IT IS ORDERED that:

1. The motion of Alleco, Inc., LP

Acquisition Corporation, and Lapides

Corporation for summary judgment is

DENIED;

2. The motion of IBJ Schroder Bank

& Trust Company for summary judgment is

GRANTED, as follows:

a. Judgment is entered in favor

of Schroder and against Alleco,

D-49

Service America, Lapides and LP,

dismissing with prejudice the

original Complaint and the First

Amended and Supplemental

Complaint in this matter,

b. Further, judgment is entered

in favor of Schroder on its

First Counterclaim and against

Alleco, Service America, Lapides

and LP, declaring that Alleco is

not released from liability for

the payment of principal and

interest on Alleco’s 9-1/2%

Convertible Senior Subordinated

Debentures Due 2010 in the

principal amount of $105

million, and

c. Further, judgment is entered

in favor of Schroder on its

Third Counterclaim and against

Alleco, Service America, Lapides

and LP, declaring that LP’s

D-50

acquisition on September 14,

1988 of Alleco’s publicly-held

common stock through a tender

offer by LP, the merger of

Alleco with and into LP on

October 18, 1988, and the

dissolution of the surviving

corporation and the distribution

of its assets to Lapides on

November 8, 1988, constituted a

repudiation of Alleco’s

obligations under the Debentures

and under the Indenture, dated

as of September 1, 1985, between

Alleco and the original trustee,

First Trust Company, Inc., and

a breach of the covenants

contained in Section 5.05 of the

Indenture, giving rise to an

Event of Default under the

Indenture and permitting

Schroder properly to give

D-51

written notice of default and to

declare the principal of all the

Debentures and the interest

accrued thereon to be

immediately due and payable.

3. The motion of Service America

Corporation for summary judgment is

DENIED with respect to the counteclaims

of IBJ Schroder Bank & Trust Company, and

GRANTED with respect to the counterclaims

of Salomon Brothers, Inc., and Salomon’s

counterclaims are DISMISSED; and .

4. The second and fourth

counterclaims of Schroder’s First Amended

and Supplemental Complaint and

Counterclaims are dismissed without

prejudice pursuant to Fed. R. Civ. P.

41(a)(2).

D-52

LET JUDGMENT BE ENTERED ACCORDINGLY.

Dated: August 16, 1989.

Paul A. Magnuson

United States

District Judge

D-53

APPENDIX E

UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF MARYLAND

IN RE: *

ALLECO, INC. * Case No.

Debtor * 894 2987

Debtor’s Employer Tax *

Identification No.

52-1158079 *

*

* * * * * *

INVOLUNTARY CASE: CREDITORS’ PETITION

1. Salomon Brothers Inc., New York

City, New York; Fidelity Magellan Fund,

Boston, Massachusetts; Mutual Series Fund

Inc., Short Hills, New Jersey, (through

its portfolio funds: Mutual Shares Fund,

Mutual Qualified Fund, and Mutual Beacon

Fund) are creditors of Alleco Inc.

("Alleco" or the "Debtor", which terms

include the entities set forth in the

caption and their predecessors in

interest) of Allegheny Circle, Cheverly,

Prince George’s County, Maryland 20781,

holding claims against the Debtor, not

=

contingent as to liability and not

subject to bona fide dispute, amounting

in the aggregate, in excess of the value

of any lien held by them on the Debtor’s

property securing such claims, to at

least $5,000.

IBJ Schroder Bank & Trust Company

("Schroder* or "Indenture Trustee") of

One State Street, New York, N.Y. 10004 is

the successor indenture trustee, having

succeeded First Trust Company, Inc. as

trustee, under an Indenture dated as of

September 1, 1985 (which, together with

Supplemental Indentures thereto, will be

referred to herein as the "Indenture" )

between Allegheny Beverage Corporation

(now Alleco) and First Trust Company,

Inc. pertaining to the issuance of

$105,000,000 of 9-1/2% Convertible Senior

Subordinated Debentures Due 2010 (the "9-

1/2% Debentures").

The nature and amount of

petitioners’ claims are ag follows:

A. Salomon Brothers Inc is the

holder of $18,525,000 principal

amount of the 9-1/2% Debentures.

Mutual Shares Fund is the holder of

eetants

$5,095,000 principal amount of the

) 9-1/2% Debentures. Mutual Qualified

| Fund is the holder of $2,200,000

principal amount of the 9-1/2%

pebicnitieiciien. Mutual Beacon Fund is

the holder of $948,000 principal

amount of the 9-1/2% Debentures.

B. As described more fully below

and in the Memorandum and Order of

U.S. District Court Judge Paul A.

| Magnuson dated August 16, 1989 (a

copy of which is attached hereto as

Exhibit A) issued in the case of

Alleco Inc. v. IBJ Schroder Bank &

Trust Company, et al., United States

District Court for the District of

Minnesota, Third Division, Civil

E-3

File No. 3-87-0802 (the "Declaratory

Judgment Action"), Alleco has

defaulted under the Indenture.

C. In May 1987, Alleco entered into

an agreement to sell what was then

the last of its operating

subsidiaries by selling it via a

leveraged buy-out to another entity

for cash and the assumption of

certain obligations (the "Sale

Transaction"). Alleco asserted that

after the Sale Transaction it would

no longer be liable on its payment

obligations to the holders of the 9-

1/2% Debentures. Holders of the 9-

1/2% Debentures advised ALleco that

following the proposed Sale

Transaction, Alleco would remain

liable on such payment obligations.

Alleco responded on November 30,

1987 by instituting the Declaratory

Judgment Action. On December 2,

1987, Alleco closed the _ Sale

Transaction.

D. On July 13, 1988, Alleco

announced a series of transactions,

including a certain tender offer,

merger and dissolution, pursuant to

which, Alleco was to pay to Alleco

shareholders $65,000,000 in cash to

retire substantially all of the

outstanding stock (the "Repurchase

Transactions") but for the stock

held directly and indirectly by

Alleco’s Chairman, Morton Lapides.

Schroder and certain holders of the

9-1/2% Debentures advised Alleco

that the proposed Repurchase

Transactions would violate the

covenant in the Indenture

restricting dividends and

redemptions of capital stock, and

would constitute an event of default

under the Indenture. Between

September 14, 1988 and November 9,

1988, Alleco consummated the

Repurchase Transactions.

E. Counterclaims and amended and

supplemental complaints, responsive

pleadings, and cross-motions for

summary judgment were filed in the

Declaratory Judgement Action,

bringing squarely before the U.S.

District Court the issues of (i)

whether Alleco continued to be

liable to the holders of the 9 1/2%

Debentures after the Sale

Transaction, and (ii) whether the

Repurchase Transactions violated the

Indenture.

F. By Memorandum and Order dated

August 16, 1989, U.S. District Court

Judge Paul A. Magnuson determined

that Alleco and its controlling

shareholder "flaunted the Indenture,

and have pursued these schemes with

E-6

utter disregard for the rights of

the Debenture holders”. Judge

Magnuson concluded that Alleco

“violated numerous terms of the

Indenture", and is thereby in

default under the Indenture covering

the 9-1/2% Debentures. (Exhibit A,

pages 25-26.)

G. On September 11, 1989, Schroder

issued notice to ALleco declaring

the entire principal of the 9-1/2%

Debentures and accrued interest

thereon to be in default and to be

due and payable immediately, and

delivered demand for payment to

Alleco. A copy of the Notice of

Acceleration and Demand for Payment

is attached hereto as Exhibit B. In

consequence of such defaults and

Notice, the entire $105,000,000 in

principal under the 9-1/2%

Debentures, and accrued interest

E-7

thereon, is currently due and

payable.

H. The obligations currently due

and payable to the petitioners as

described above remain unpaid at the

date of this Petition.

2. The Debtor’s principal place of

business has been within this district

for the 180 days preceding the filing of

this petition.

3. The Debtor is a person against

whom an order for relief may be entered

under Title 11, United States Code.

4. The Debtor is generally not

paying its debts which are not subject to

bona fide dispute as they become due as

indicated by the following:

A. The Debtor has failed to pay

$105,000,000 in principal, plus

E-8

accrued interest thereon, currently

due and payable to the petitioners

and the other holders of the 9-1/2%

Debentures, despite demand therefor.

B. The most recent of Debtor’s

financial statements available to

petitioners appears in Form 10-Q

filed by the Debtor with the

Securities and Exchange Commission

dated August 11, 1989 (attached

hereto is Exhibit C). It contains,

inter alia, an unaudited condensed

consolidated balance sheet of Alleco

dated June 30, 1989 (the “Balance

Sheet"), at pages 5-6 of Exhibit C;

a condensed consolidated statement

of operations for the nine-months

ended June 30, 1989 (The “"Nine-

Month" Operating Statement), at

pages 7-8 of exhibit C; and a

condensed consolidated statement of

cash flows for the nine-months ended

E-9

June 30, 1989 (the "Nine-Month Cash

Flow Statement"), at pages 9-10 of

Exhibit C.

(i) The Balance Sheet reflects

aggregate assets in the amount of

$101,666,000, and aggregate

liabilities of $92,848,000, without

including among the liabilities the

$105,000,000 currently due and

payable under the 9-1/2% Debentures.

As noted in the second paragraph of

page 2 of Exhibit C (amplified under

the heading "Extraordinary Items" at

page 4 of Exhibit C), Alleco prepaid

and retired certain debentures on

July 14, 1989 (two weeks after the

date of the Balance Sheet) at a cost

of $24,563,000, thereby effectively

reducing the current liabilities of

Alleco by $24,563,000 and apparently

reducing its cash by a like amount

of $24,563,000. FPurthermore, Note

E-10

fc a a a lS : a

eo, wend

|

Alleco debt in default and unpaid to

the petitioners and the other

holders of the 9-1/2% Debentures

constitutes 70% of the outstanding

debts of Alleco. It is likewise

evident that Alleco’s aggregate

assets of $77,103,000 are

substantially less than the

$105,000,000 currently due and

payable to the 9-1/2% Debenture

holders, and that debtor’s aggregate

liabilities exceed its aggregate

assets by over $70,000,000.

(ii) The Nine-Month Operating

Statement reports a loss of

$1,138,000 on aggregate revenues of

$16,502,000. Of the aggregate

revenues reported by Alleco,

$4,102,00 is a non-recurring income

tax refund, which, if not received

during that nine-month period, would

have increased the nine-month loss

to $5,240,000.

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Alleco debt in default and unpaid to

the petitioners and the other

holders of the 9-1/2% Debentures

constitutes 70% of the outstanding

debts of Alleco. It is likewise

evident that Alleco’s aggregate

assets of $77,103,000 are

substantially less than the

$105,000,000 currently due and

payable to the 9-1/2% Debenture

holders, and that debtor’s aggregate

liabilities exceed its aggregate

assets by over $70,000,000.

(ii) The Nine-Month Operating

Statement reports a joss of

$1,138,000 on aggregate revenues of

$16,502,000. Of the aggregate

revenues reported by Alleco,

$4,102,00 is a non-recurring income

tax refund, which, if not received

during that nine-month period, would

have increased the nine-month loss

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to $5,240,000.

(iii) The Nine-Month Cash Flow

Statement shows a decrease in "Cash

and cash equivalents" from

$194,816,000 at the beginning of the

period to $35,361,000 at the end of

the period. If the post-June 30,

1989 debenture prepayment

($24,563,000) described above is

deducted from the June 30, 1989

figure, it is evident that the drop

in "Cash and cash equivalent" is

from $194,816,000 at the beginning

of the period to $10,798,000 at the

end.

C. As described in Paragraph 4B(i)

above, Debtor has pre-paid an

antecedent debt of $24,563,000 to

holders of certain debentures on

July 14, 1989, a payment which

constitutes a preference within the

meaning of 11 U.S.C. Section 547

E-13

since a petition under Title 11,

United States Code has been filed

within ninety days of that payment

(see Exhibit C, pages 2 and 4).

D. Between September 14, 1988 and

October 18, 1988, Alleco distributed

to common stockholders $65,000,900

in the Repurchase Transactions (more

fully described on pages 7-9 of

Exhibit A), which violated the

restriction against dividends and

redemption of capital stock in

petitioner's 9-1/2% Debenture

Indenture, a transaction determined

by District Judge Magnuson (Exhibit

A, pages 17-20) to have violated the

Indenture. The described Repurchase

Transactions appear to be a series

of transactions avoidable under the

provisions of 11 U.S.C. Section 548.

WHEREFORE, petitioners prays that an

ordexs of relief be entered against

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td i Ie tate ABs Ml PRE eh Wi Ea laa ly TMi Tes ble

Alleco Inc. under chapter 7 of Title 11

of the United States Code.

Nathan B. Feinstein

Piper & Marbury

36 South Charles Street

Baltimore, MD 21201

(301) 576-1900

Attorney for Petitioners

Of Counsel:

Wachtell, Lipton, Rosen & Katz

299 Park Avenue

New York, New York 10171

(212) 371-9200

E-15

APPENDIX F

Maryland Code Annotated,

Corporations

Section 2-301

Section 2-301. “Insolvent” defined.

In this subtitle "insolvent" means

that a corporation:

(1) Has debts which exceed the fair

value of its assets; or

(2) Is unable to meet its debts as

they mature in the ordinary course of its

business. (An. Code 1957, art. 23,

Sections 32, 37; 1975, ch. 311, Section

2.)

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APPENDIX G

Maryland Code Annotated,

Section 2-303

Section 2-309. Dividends.

(a) General rule. - If declared by

its board of directors and unless

contrary to a restriction contained in

its charter, a corporation may pay

dividends on its shares in cash,

property, or its own stock, subject to

the provisions of this section.

(b) Restrictions on declaration or

payment. - A dividend may not be declared

or paid if:

(1) The corporation is insolvent

or the payment would cause the

corporation to become insolvent; or

(2) The corporation’s stated

capital is impaired or the payment would

impair its stated capital.

(Cc) Dividend from source other than

earned surplus. - If a dividend is paid

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from any source other than earned

surplus, the source of the dividend shall

be disclosed not later than at the time

of payment to the stockholders who

receive it.

(d) Dividend on junior class. -

Capital surplus paid with respect to 4

class of stock may not be used for the

payment of dividends on any class of

stock junior to it.

(e) Stock dividend. - (1) A split-up

or division of issued shares into a

greater number of shares of the same

class without any change in the aggregate

amount of stated capital is not a stock

dividend within the meaning of this

section.

(2)(i) If a dividend is payable

in a corporation’s own stock with par

value, the shares shall be issued at par

value and, at the time the dividend is

paid, the corporation shall transfer from

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surplus to stated capital an amount equal

to the aggregate par value of the shares

to be issued.

(ii) The corporation may

transfer any additional amount from

earned surplus to capital surplus as the

board of directors determines.

(3)(i) If a dividend is payable

in a corporation’s own stock without par

value, the board of directors shall adopt

at the time the dividend is declared a

resolution which sets the amount to be

attributed to stated capital with respect

to the shares and, at the time the

dividend is paid, the corporation shall

transfer the amount from surplus to

stated capital.

(ii) The corporation may

transfer any additional amount from

earned surplus to capital surplus as the

board of directors determines.

(iii) The amount per share of

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stock transferred to stated capital and

any amount transferred to capital surplus

shall be disclosed not later than at the

time of payment to the stockholders who

receive the dividend.

(4) A dividend payable in shares

of one class of a corporation’s stock may

not be declared or paid to the holders of

shares of another class of stock unless

the payment has been:

(i) Approved by the board of

directors under the charter; or

(ii) Approved at a meeting of

stockholders by the affirmative vote of

a majority of all the votes entitled to

be cast on the matter of each class

entitled to vote on it.

(f) Dividend by corporation entitled

to depletion allowance. - A corporation

which is substantially engaged in the

exploitation of any mine, timber, oil

well, gas well, patent, or other wasting

asset, or in the development and

ownership of real property, or organized

substantially for the purpose of

liquidating a specific asset may

distribute the net income derived from

the exploitation of the wasting asset or

from the real property, or the net

proceeds derived from the liquidation

without making any deduction or allowance

for the depletion of the asset or the

depreciation of the real property

incidental to the lapse of time,

consumption, wear, liquidation, or

exploitation if:

(1) Adequate provision is made

for debts and liabilities, other than

stated capital, and for the aggregate

preferential amount payable in the event

of voluntary liquidation to the holders

of stock which has preferential rights;

and

(2) Notice that no deduction or

G-5

allowance has been made for the depletion

or depreciation is given not later than

the time of payment to stockholders

receiving the dividend. (An. Code 1957,

art. 23, Section 37; 1975, ch. 311,

Section 2; 1978, ch. 277.)

APPENDIX H

Maryland Code Annotated,

Corporations

Section 2-312

Section 2-312. Disposition of acquired

stock.

Unless its charter provides

otherwise, if a corporation acquires its

own stock, other than convertible shares

surrendered to it or stock acquired for

retirement, it may hold, sell, or

otherwise dispose of the stock for any

corporate purpose as determined by the

board of directors. (An. Code 1957, art.

23, Section 32; 1975, ch. 311, Section

as)

H-1]

APPENDIX I

Maryland Code Annotated,

Corporations

Section 3-412

Section 3-412. Distributions to

stockholders in voluntary dissolution.

(a) Notice to stockholders to prove

interest. - If a Maryland corporation is

voluntarily dissolved and assets are

available for distribution to

stockholders, the director-trustees or

receiver may notify the stockholders to

prove their interests within a specified

time at least 60 days after the date of

the notice. The notice shall be mailed

to each stockholders at his address as it

appears on the records of the corporation

and published at least once a week for

three successive weeks in a newspaper of

general circulation published in the

county in which the principal office of

the corporation is located. The date of

the notice is the later of the date of

I-]

mailing or the date of first publication.

(b) Distribution of pro rata shares.

- After the expiration of the time

specified in the notice, the director-

trustees or receiver may distribute to

each stockholder who has proved his

interest his proportionate share of the

assets, reserving the shares of those who

have not proved their interests.

Thereafter, the director-trustees or

receiver may incur reasonable expenses in

locating the remaining stockholders and

Sat i Ao i at ai

securing proof of interests from them and

may charge the expenses against the funds

undistributed at the time the expenses

are incurred. From time to time the

director-trustees or receiver may

distribute a proportionate share to any

stockholder who has proved his interest

iC AN bis Ret LLY pik PL ARH oe A Tere =r

since the prior distribution.

(c) Final distribution. - No earlier

than three years from the date of the

I-2

ST eT mE es

original notice, the director-trustees or

receiver may distribute all surplus

assets remaining under his control to

those stockholders who have proved their

interests and are entitled to

distribution. After final distribution,

the interest of any stockholder who has

not proved his interest is forever barred

and foreclosed.

(d) Unclaimed assets. - (a) Any

assets remaining unclaimed 60 days after

the final distribution, whether through

failure or inability of the postal

authorities to deliver the distribution

checks or for any other reason is

presumed abandoned and shall be reported

to the abandoned property unit of the .

State Comptroller’s office in accordance

with Title 17 of the Commercial Law

Article, the Maryland Uniform Disposition

of Unclaimed Property Act.

(2) The director-trustees or

I-3

receiver are released and discharged from

all further liability in the matter on

payment or delivery of all unclaimed

assets to the abandoned property unit of

the State Comptroller’s office. (An. Code

1957, art. 23, Section 83; 1975, ch. 311,

Section 2; 1976, ch. 387, Section 1;

1977, ch. 529.)

I-4

APPENDIX J

ee A ei on ia et 1. eo:

ee ee a

Federal Rules of Civil Procedure

Rule 19

Rule 19. Joinder of Persons Needed for

Just Adjudication.

(a) PERSONS TO BE JOINED IF

FEASIBLE. A person who is subject to

service of process and whose joinder will

not deprive the court of jurisdiction

over the subject matter of the action

shall be joined as a party in the action

if (1) in the person’s absence complete

relief cannot be accorded among those

already parties, or (2) the person claims

an interest relating to the subject of

the action and is so situated that the

disposition of the action in the person’s

absence may (i) as a practical matter

impair or impede the person’s ability to

protect that interest or (ii) leave any

of the persons already parties subject to

a substantial risk of incurring double,

multiple, or otherwise inconsistent

J-1

obligations by reason of the claimed

interest. If the person has not been so

joined, the court shall order that the

person be made a party. If the person

should join as a plaintiff but refuses to

do s0, the person may be made a

defendant, or, in a proper case, an

involuntary plaintiff. If the joined

party objects to venue and joinder of

that party would render the venue of the

action improper, that party shall be

dismissed from the action.

(b) DETERMINATION BY COURT WHENEVER

JOINDER NOT FEASIBLE. If a person as

described in subdivision (a)(1)-(2)

hereof cannot be made a party, the court

shall determine whether in equity and

good conscience the action should proceed

among the parties before it, or should be

dismissed, the absent person being thus

regarded as indispensable. The factors

to be considered by the court include;

first, to what extent a judgment rendered

in the person’s absence might be

prejudicial to the person or those

already parties; second, the extent to

which, by protective provisions in the

judgment, by the shaping of relief, or

other measures, the prejudice can be

lessened or avoided; third, whether a

judgment rendered in the person’s absence

will be adequate; fourth, whether the

plaintiff will have an adequate remedy if

the action is dismissed for nonjoinder.

(Cc) PLEADING REASONS FOR NONJOINDER.

A pleading asserting a claim for relief

shall state the names, if known to the

pleader, of any persons as described in

subdivision (a)(1)-(2) hereof who are not

joined, and the reasons why they are not

joined.

(d) EXCEPTION OF CLASS ACTIONS.

This rule is wuitent to the provisions of

Rule 23.

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APPENDIX K

Federal Rules of Civil Procedure

Rule 23(e)

Rule 23. Class Actions.

(e) DISMISSAL OR COMPROMISE. A

class action shall not be dismissed or

compromised without the approval of the

court, and notice of the proposed

dismissal or compromise shall be given to

all members of the class in such manner

as the court directs.

APPENDIX L

Federal Rules of Civil Procedure

Rule 26(c)

Rule 26. General Provisions Governing

Discovery.

(c) PROTECTIVE ORDERS. Upon motion

by a party or by the person from whom

discovery is sought, and for good cause

shown, the court in which the action is

pending or alternatively, on matters

relating to a deposition, the court in

the district where the deposition is to

be taken may make any order which justice

requires to. protect a party or person

from annoyance, embarrassment,

oppression, or undue burden or expense,

including one or more of the following:

(1) that the discovery not be had; (2)

that the discovery may be had only on

specified terms and conditions, including

a designation of the time or place; (3)

that the discovery may be had only by a

method of discovery other than that

L-1l

selected by the party seeking discovery;

(4) that certain matters not be inquired

into, or that the scope of the discovery

be limited to certain matters; (5) that

discovery be conducted with no one

present except persons designated by the

court; (6) that a deposition after being

sealed be opened only by order of the

court; (7) that a trade secret or other

confidential research, development, or

commercial information not be disclosed

or be disclosed only in a designated way;

(8) that the parties simultaneously file

specified documents or information

enclosed in sealed envelopes to be opened

as directed by the court.

If the motion for a protective

order is denied in whole or in part, the

court may, on such terms and conditions

as are just, order that any party or

person provide or permit discovery. The

provisions of Rule 37(a)(4) apply to the

L-2

award of expenses incurred in relation to

the motion.

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